Financial market frictions and diversification

Matvos, G and Seru, A and Silva, R (2017) Financial market frictions and diversification. Journal of Financial Economics. ISSN 0304-405X (In Press)

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Official URL: https://doi.org/10.1016/j.jfineco.2017.09.006

Abstract

We find new facts that relate the evolution of firm scope to the changing frictions in external capital markets over the last three decades. We find that large, diversified publicly traded firms increase their scope during times of high external capital market frictions, such as in the recent Great Recession. Moreover, during these times firms diversify their investment needs and cash flow across industries. We also find similar phenomena outside diversified public firms. Examining the mergers and acquisitions activity of stand-alone and diversified private firms, we uncover similar patterns. In aggregate data, we find that the composition of mergers shifts from focused to diversifying and back with changes in external market conditions. Our evidence is broadly consistent with the notion that firms diversify their scope in response to tightening in external capital markets.

Item Type: Article
Additional Information: © 2017 Elsevier
Subjects: C > Conglomerate companies
C > Capital markets
T > Theory of the firm
Subject Areas: Finance
DOI: 10.1016/j.jfineco.2017.09.006
Date Deposited: 11 Nov 2016 15:48
Last Modified: 16 Nov 2017 14:16
URI: http://lbsresearch.london.edu/id/eprint/598

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